Saturday, September 24, 2011

"The Price of Gold in the Year 2160"

From The Baseline Scenario:

It’s become quite popular to talk about the price of gold . . . in blogs, the press, at dinner parties. The latest topic of debate is not about the price of gold as a commodity, but about gold as the one and only king money. The basic argument is that 5,000 years of tradition will overwhelm the tyranny of modern government and the fiat printing press. The barbaric relic will defeat socialism, fascism, Obama-ism, and restore liberty to the world, after a terrible economic collapse in which gold-owning visionaries become fabulously wealthy.

Perhaps they are correct—or perhaps not. I don’t know what will happen in 10 years. However, unless civilization utterly collapses (which is what gold hoarders seem to want), the gold bubble will collapse. And I don’t mean the 10 year “bubble” . . . I mean the 5,000 year bubble.

This claim might sound crazy, but it’s quite easy to defend, for the simple reason that there is too darn much gold. Gold enthusiasts will note that you can’t just print gold like fiat paper. They will note that high quality mines are failing, and argue that we’ve passed “peak gold”.

The argument for the collapse has little to do with terrestrial mine quality (although massive amounts of money and new technology are flowing into exploration, long term mine development and extending the life of existing mines). The argument merely requires that gold price ultimately responds to supply.

I can’t tell you whether we’ll run out of new mines, or Asian jewelry demand will ever be satiated, or global central banks will ever realize that currencies are supposed to serve economies (rather than vice versa). But I do know that in the year 2160 (give or take a century) gold will no longer be viewed as money. Why? For the same reason that all commodity based money systems have collapsed—technology made their production too cheap. Gold bugs like to talk about how every paper based money has failed (or will fail), but they ignore the equally miserable track record of commodity based money systems. For example, the cowry shell, which was used in ancient China and India, a weight of barley (the shekel), copper, cigarettes, or that most insidious of monopolistic money systems—salt.

So how did these money systems fail? Did their cultures implode? Did their governments fail? Quite the contrary, all commodity based money systems were destroyed by one simple factor—technology. At some point, technology enabled low cost production of the commodity, and the currency collapsed.
Very well, but what about gold? Even with technological advances, there just isn’t that much easy-to-get gold in the crust of the earth.

True. And the reason gold is so rare in the crust of the earth? Well, that’s because it’s relatively abundant in the earth’s core. When the earth was cooling, most iron-loving minerals sank toward a massive lump of molten iron down near the core. That includes gold and other heavy metallic elements. So where did the gold we currently have come from? Recent evidence suggests it came from smaller asteroid impacts that were not sufficiently large to break through the existing crust of the Earth. Although we’ve suspected this for a while, news is now hitting the mainstream....MORE